Assured Guaranty: How's Your Confidence in the Rating Agencies?

I thought of sharing with you some of the key observations we had in the case of Assured Guaranty (AGO).

Currently, AGO has a market cap of $1.8 billion and book value of $1.6 billion. The company’s investment portfolio totals $2.46 million comprising MBS and ABS of which 82% is AAA rated. However, AGO has a significant exposure to RMBS through the provisioning of financial guarantees.

According to the company’s last quarterly filings, it had exposure to RMBS, subprime RMBS, CDOs of ABS and Prime RMBS exposures totaling $21.5 billion. Out of this, 17.3% were rated BBB or lower. Following is the detailed breakup of AGO’s exposure on these securities:

• $6.53 billion of subprime RMBS tranches (all rated AAA)
• $905 million CDOs of Mezzanine ABS (again all AAA rated)
• $1.26 billion of CDOs of High Grade Pooled ABS (again all rated AAA).
• $14.23 billion of RMBS comprises a mix of Prime, HELOC and Alt-A loans, 24% of which are rated BBB or lower. Detail breakup:

- HELOC worth $2.52 billion rated BBB

- Alt-A exposure $4.14 billion, majority of which are rated AAA

- Prime exposure worth $2.54 billion rated in the range AAA to BBB

- Remaining $5.12 billion exposure is in the international market

Please note that in the last six months, when the credit crisis started unfolding, AGO’s share price has dropped only by 15%, as compared to 75% - 90% for its peers (please refer to the price chart). That means that either this company is extremely good in fundamentals, or, everybody in the market is busy in bashing Ambac and MBIA since these two companies are the largest bond insurers.

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Considering this and the fact that there’s hardly been an impact on the company’s stock price in the last six months when others have lost there market caps by two-thirds, AGO looks like an outlier. Moreso, I noticed that many of the sell side houses rate this company a buy and the pundits consider it a safe AAA play. I don't see this. I have ZERO faith (if that much) in the ratings agencies. Unless these guys have some fundamental info on underwriting and credit quality that I don't, I believe they are wrong.

I don't have time to put a forensic analyst on this before the earnings release, but I have been short this stock for some time. I will look into some details and hopefully post back before the earnings release.

Disclosure: short AGO